Economic Theory - Jun Zhang (UTS)

Title: Optimal Mechanism Design with Referral

Abstract: This paper establishes the optimal selling mechanism when a seller can incentivize an existing buyer to refer a privately known potential buyer to compete for an object. We identify three optimal channels in providing referral incentives: discouraging non-referral, favoring referral, and providing informational rent for referral. While the first two channels always appear and are essential, the third one is supplementary and appears when the potential buyer is less likely to exist and stronger. We also provide conditions under which the optimal mechanism can be implemented by simple mechanisms. Finally, we show that the conventional resale mechanism is suboptimal.